Question

1. A corporation bought a 7-year class machine 3 years ago for $140,000 and sold it today for $100,000. The machine is being depreciated to zero salvage value using straight-line method. If the firm's tax rate is 34%, what is the tax effect of the sale?

   		-$6,800
   		-$3,400
   		$3,400
   		$6,800

question:

What is the Payback period of a project with cash flows of -350,000 in year 0, then 100,000 each in years 1, 2 & 3, then 250,000 in year 4? Assume the cost of capital is 10%.

		2.0 years
		2.75 years
		3.2 years
		can't tell from information given

Answer 1

Answer - 1)
Calculation of derpreciation amount - Total asste / No of years
Depreciation amount = 140000 /7 = 20000 per year
book value after 3 years = 140000 - accumulated depreciation of 3 year
book value after 3 year = 140000 - (20000*3 = 60000)
book value after 3 year = 140000 - 60000 = 80000
Sale of machine = 100000
Profit on sale of machine = 100000 - 80000
Profit on sale of machine =20000
Tax on sale = 20000 *34% = 6800
Tax effect on sale = -6800

Answer-2)
Correct Answer is option 3
3.2 years

Year	Cashflow	Cummulative CF
0	-3,50,000.00	-3,50,000.00
1	1,00,000.00	1,00,000.00
2	1,00,000.00	2,00,000.00
3	1,00,000.00	3,00,000.00
4	2,50,000.00	5,50,000.00

Payback Period = 3 year + {(350000 - 300000) / 250000
payback period = 3.2 years

I hope this clear your doubt.

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